Andy Lorenz: Healthier construction industry good news for everyone

The recent economic downturn cost more than two million commercial construction jobs and reduced a $1.2 trillion-a-year industry to an $800 billion-a-year one.

However, after nearly six years, the construction industry is making modest strides toward a recovery, according to the Associated General Contractors of America’s recent national Hiring and Business Outlook.

Construction activity over last year is trending flat, yet we have reason to be cautiously optimistic about what this next year and future years will bring. Here’s why: nearly 190,000 jobs were added in the nonresidential construction sector last year and projects that were put on hold or canceled during the credit crunch have resumed.

Firms tell the AGC they are poised to add staff and are at a point where they feel confident enough to pass along some of the increased material costs in their bids — costs that were previously absorbed in an effort to win business during tough economic conditions, an unsustainable strategy over the long term.

Additionally, construction unemployment has dropped to 10.6 percent — an improvement over recent years but still higher than the overall national average of 7.6 percent.

Despite the economic conditions, our firm, Messer Construction Co., recently completed the John Tickle Engineering Building at the University of Tennessee as well as the new Carter Elementary School.

Flat growth is projected in higher education, health care and public market segments. The drivers behind work in higher education and health care projects are competition between universities for students as well as changes in how health care is going to be delivered.

Colleges of the same caliber compete for students largely based on student experience — housing, activity centers and food service. Research centers compete for grant money and intellectual capital.

Most hospital projects are expansions or renovations rather than new construction, with existing buildings being repurposed to outpatient service centers and physician offices.

While the credit crunch is easing somewhat, financing can still present a challenge, especially for public sector entities that must carefully monitor debt ratios and among organizations supported by private endowments that lost value when stocks tumbled. This difficulty has spurred a new financing mechanism, the public-private partnership. For example, a private developer may arrange financing for a new university building, see it through construction and then lease it or sell it to the public entity.

Overall, East Tennessee has been somewhat slower in the construction recovery than other regions where we operate.

However, we are seeing requests for proposals in industrial, higher education and life science sectors, which is positive for the area. Alcoa announced plans for a $275 million expansion that will create 400 construction and 200 permanent jobs. Eastman Chemical similarly plans a $1.6 billion expansion of its Kingsport facility, adding 300 new jobs.

On the higher education front, we continue to see the University of Tennessee investing in several large-scale projects.

So how does this impact you? Residential and commercial construction are connected in that trends in one sector flow across to the other.

As more homes are built, those residents are supported with new hospitals, schools, infrastructure projects and the like. Subsequently, retailers are drawn to locate where the houses and public buildings are. That symbiotic relationship holds true in both upswings and downturns.

Additionally, when homes and commercial buildings are under construction, the trickle-down effect impacts the wide network of support services that are necessary to supply those projects — including material suppliers, subcontractors, truck and equipment providers, insurance providers, and more.

While these are all signs of returning health, the recovery is fragile and could easily be derailed by several factors, including the effects from the global economy, commodity and fuel costs, and inflation and interest rates. The construction industry may never recover to pre-recession levels, but the rebound observed over the past few years has reset a new normal.

A robust construction industry serves as a bellwether indicator of growth and general economic health, and it appears in a larger sense that we are slowly moving in the right direction.